Last week, petrol and diesel prices hit a two-year high. Petrol is now well into super-senior citizen territory (above ₹80 a litre) while diesel is getting there. At Indian Oil’s petrol pumps in Chennai, petrol costs ₹86.51 a litre, while diesel costs ₹79.21. Howzat, many wonder, when crude oil — the fountainhead of these fuels — is still below 2018 levels? Mysterious indeed are the ways of the government, especially when it comes to petrol and diesel pricing.

What is it?

Many ingredients go into the boiling broth that is fuel prices. First, the pricing mechanism. The price of petrol and diesel in India is not determined by the actual costs incurred by PSU refiners such as Indian Oil, HPCL and BPCL on crude oil sourcing, refining and marketing. Rather, a formula — trade parity price (TPP) — is used to price these products.

It assumes that 80 per cent of petrol and diesel is imported into India and 20 per cent is exported. So, petrol and diesel prices in India are determined based on prices of these fuels in the international market — and not on the basis of crude oil prices. Now, while international petrol and diesel prices generally move in line with crude oil prices, it need not always be the case, given that demand and supply dynamics could be different. It doesn’t help that global crude prices have been rising and now trade about $50 a barrel, up from the Covid-induced low of about $20 in April.

The TPP in dollars is converted to rupees. Then come other costs and margins of the oil companies, dealer commission and taxes. From mid-June 2017, the pricing of petrol and diesel is done through a ‘daily pricing’ mechanism, based on a 15-day rolling average international rate. So, time lag has an effect too. The weakening of the rupee against the dollar over the years has added to the fuel’s cost.

Then, there are the taxes. Petrol and diesel are the government’s cash cows. During the crude crash earlier this year, a cash-strapped Centre raised excise duty on petrol and diesel by ₹13-16 a litre; many States too increased their sales tax/VAT. But when oil prices started rising, the taxes were not rolled back, fuel prices increased, and customers bore the brunt. Heads I win, tails you lose — says the government. Believe it or faint, taxes now account for about 60 per cent of the fuels’ price.

Finally, there are the many mystery pricing pauses. For more than 80 days between March and June, when they should have fallen, the fuels’ prices were frozen. This stop-start method leads to opacity in pricing.

Why is it important?

India imports most of its oil needs but is more than self-sufficient in petrol and diesel production. So, the trade parity pricing mechanism has often been criticised, especially since petrol and diesel are ‘decontrolled’ fuels. The complaints include allegations of cartelisation with the three PSU oil companies charging nearly the same price, despite different cost structures and efficiencies. Transparent pricing, based on market principles, will likely help consumers more.

Why should I care?

Primarily because it could have a big impact on your pocket. Higher petrol and diesel prices don’t just mean higher personal transport costs. They could also cause a price spike in a host of goods and services, given that these fuels play a big part in running the economy’s wheels. Inflation has already reared its head again.


It’s a constant duel with the pricing of fuel.

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